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The IEA Is Grossly Overestimating Shale Growth

Oil

This week, the IEA said that U.S. shale would dominate the oil and gas markets over the next decade, rising to “a level 50 percent higher than any other country has ever managed.” With a “remarkable ability to unlock new resources cost-effectively,” U.S. shale will add millions of barrels of new oil supply by 2025.

But some view such heady predictions as fanciful. There are a variety of reasons why U.S. shale could struggle to add several million additional barrels per day over the next few years. But here are just a few.

First, shale suffers from steep decline rates, much steeper than conventional wells. That means drilling is like running on a treadmill—more and more wells need to be drilled just keep production flat. The extraordinary rate of drilling over the past few years means that the industry not only needs to keep going at that frenzied pace, but it needs to expand its rate of drilling to add more barrels.

Just to cite a small example of the challenge the industry faces, the Permian Basin—the most prolific in the U.S.—has a legacy decline rate that has exploded over the past few years.

According to the EIA, the basin will lose 165,000 bpd of production in December, meaning that the industry needs to add that amount in fresh supply to keep output from falling. The agency does see the industry bringing 223,000 bpd of new supply online in December, but that nets out to only an addition of 58,000 bpd after the decline rates are factored in. The Permian hasn’t yet seen its output peak, but it will be very tall task to keep production growing for years to come, especially since the decline rate grows larger and larger.

Related: Why Saudi Arabia Should Fear U.S. Oil Dominance

Second, drillers go after the sweetest spots first, which means that they will have to downgrade to less desirable locations in the years ahead. That makes the job of growing production all the more difficult.

Third, the rig count has already started to decline in the past few months, evidence that shale drillers were sputtering with WTI in the low $50s per barrel.

Which brings us to the fourth, and perhaps most important point: the shale industry, by and large, is not profitable. It wasn’t at $100 per barrel, and it hasn’t been at $50 per barrel. There are, surely, some exceptions, but in the aggregate, shale drillers are burning through more cash than they are generating.

Fifth, without profitability, Wall Street will sour on the industry. The only thing keeping the shale bonanza going is extremely loose credit and plenty of hungry investors that have been hoping the enormous growth rates would someday translate into profits. That has thus far not been the case.

Investors have not abandoned the industry yet, but they are pressuring companies into dialing back on drilling in favor of focusing on profits. There are signs that shale executives are finally heeding the advice of their impatient shareholders. Gordon Douthat, an analyst at Wells Fargo, told the WSJ that more and more companies are starting to say that “even if we get some upside in the commodity, we’re not going to plow that into the ground—we’re going to remain disciplined.” Related: Oil Tycoon Hamm Slams EIA’s Overoptimistic Shale Forecasts

The WSJ cited the case of Marathon Petroleum, which has laid out a capital spending plan for 2018 that assumes an oil price of $50 per barrel. If oil prices end up much higher than that, the company will probably use the extra cash to pay down debt rather than step up drilling. The more companies restrain themselves, the less production growth the shale industry will achieve.

Morgan Stanley recently came out as one of the more skeptical voices on the shale boom. The investment bank said in a recent research report that it is highly unlikely that U.S. shale adds the 1 mb/d next year that a lot of other analysts assume is in the pipeline. "Right when the world's reliance on shale is growing, its limits are starting to become apparent, and there seem to be two aspects to this: ability and willingness," Morgan Stanley analysts wrote last week.

In the latest quarterly reports, a group of 18 shale companies reported an average increase in oil production by just 1 percent compared to last year’s levels, “hardly the runaway growth that overwhelms the oil market,” Morgan Stanley analysts wrote.

By James Stafford of Oilprice.com

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  • Patrick on November 16 2017 said:
    The IEA a French organization has an agenda to keep prices low for French refiners who benefit. It's all a big game of lies and semi-truths.
  • Guy Minton on November 16 2017 said:
    Accurate article. Morgan Stanley did a detailed analysis of oil companies to get the same information that is available on the Texas RRC site. At the time the did the review, oil production was not rising. Now, it’s declining, and EIA is still in the dark, because their estimates are faulty.
  • Lee James on November 16 2017 said:
    It takes courage for some one who is from the world's foremost. shale country to say that the Emperor has no clothes.

    We all want it to be true -- that it's time for U.S. oil's profitability to rebound after being down for so long. Oil has a long history of ups and downs.

    The question is, "Is it different this time?"

    Like Mr. Stafford, I think bringing in new crude oil in the U.S. has become tough enough that the industry is having to climb an increasingly steep slope. And to think, serious environmental protections have yet to be put in place, on top of already onerous drilling and completion costs.

    Really, I think it is investors hanging in there to play the dip that are keeping shale going. Short of a blow-up in the Mid-East, I don't know what is going to bring profitability to the industry.
  • citymoments on November 17 2017 said:
    After reading this article, I regained my confidence about the quality of publications on this website. May I make a humble suggesting to Mr Stafford that he should consider obtaining more future website articles from men who have qualifications in geology or oil field engineering ( from someone who has at least been to a real oil field ) ?
  • Dan on November 17 2017 said:
    Meanwhile cities are seeing record holiday traffic. I went shopping yesterday in a very small city and traffic was at a crawl, roads packed. Also country is seeing record traffic for hunters. They can't hide this much longer even while using reserves stock.
  • Kris Patel on November 17 2017 said:
    I stopped believing the EIA a while back. Anyone who has to revise their numbers so frequently and at the magnitude the have had to doesn't help credibility.

    I wonder if they're sitting in an office throwing darts and reporting where ever it lands.
  • Jeffrey J. Brown on November 17 2017 said:
    Assuming a gross (legacy) annual rate of decline of about 25%/year, US operators need to replace 100% of current Crude + Condensate (C+C) production in the next four years, just to maintain current C+C production.

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